401k fee disclosure was a project in the works for many years, going back to the mid-2000s. Eventually the Department of Labor promised Congress it would create regulations requiring plans to disclosure fees charged by service providers. The purposes are two-fold. First, disclosures help plan administrators figure costs so they can assess whether fees are reasonable and shop for better deals. Second, the disclosures to participants is meant to better inform participants what they are paying for and help them see the fees paid for the different investments in their plans so they could make investment decisions with those fees in mind.
Mutual fund fees in 401k plans for employees
Mutual fund fees and other 401k plan fees have been the source of litigation over the past ten years. Ever since the Department of Labor approved revenue sharing in the 1990s participants challenged these agreements as malicious kickback schemes.
Revenue sharing is now common practice in almost all 401k plans. The way it works is the mutual fund provider charges a percentage of assets in the fund as a fee for operating the plan but in exchange for the 401k plan offering the provider’s fund to the plan they give a portion of the fee back to the plan to offset administrative expenses to the plan. It creates a financial incentive for the plan administrator (often your employer) to choose a service provider who will cover plan expenses with revenue sharing in exchange for offering the service provider’s mutual funds.
It sounds like a win-win except the plan, due to the size of assets held in the plan, may be able to negotiate for lower fees, find funds with lower fees, or chose better performing funds, but the plan administrator may not because the more shared revenue means less cost to them. The plan administrator has a duty to participants to choose investments that benefit the participants. However, thanks to revenue sharing, that doesn’t always happen.
Impact of mutual fund fees on retirement savings for employees
If you look at the funds in your 401k, you probably see the fund fees between 0.1-3% of assets. That means each year the fund charges that percent of all your investment in that fund. The DOL calculates that a 1% fee over working years erodes 28% of savings. So while 1% may not be a big number each year, over time it adds up.
As an employment lawyer and divorce attorney I see how 401ks and other retirement plan issues affect workers and their families. Losing retirement savings can severely set back retirement plans, financial stability and deplete an emergency financial resource. Although 401k fees do not completely drain retirement savings, a loss of 28% is a significant amount. Losing over a quarter of retirement savings as an effect. Workers must work longer to make up the lost savings. That puts them more at risk for age discrimination. As an employment attorney who helps clients with age discrimination claims, I know this collateral issue can be a huge problem. It is especially problematic if the whole point of the employee’s continued employment is to hit retirement savings goals. Nobody wants to reach the end of their career below retirement savings goals and needing to hire an age discrimination attorney.